Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-34583 October 22, 1931

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late
Adolphe Oscar Schuetze,plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee.

Araneta, De Joya, Zaragoza and Araneta for appellant.

Attorney-General Jaranilla for appellee.

VILLA-REAL, J.:

The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe
Oscar Schuetze, has appealed to this court from the judgment of the Court of First Instance
of Manila absolving the defendant Juan Posadas, Jr., Collector of Internal Revenue, from
the complaint filed against him by said plaintiff bank, and dismissing the complaint with
costs.

The appellant has assigned the following alleged errors as committed by the trial court in its
judgment, to wit:

1. The lower court erred in holding that the testimony of Mrs. Schuetze was
inefficient to established the domicile of her husband.

2. The lower court erred in holding that under section 1536 of the Administrative
Code the tax imposed by the defendant is lawful and valid.

3. The lower court erred in not holding that one-half () of the proceeds of the policy
in question is community property and that therefore no inheritance tax can be
levied, at least on one-half () of the said proceeds.

4. The lower court erred in not declaring that it would be unconstitutional to impose
an inheritance tax upon the insurance policy here in question as it would be a taking
of property without due process of law.

The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of
Internal Revenue, the amount of P1,209 paid by the plaintiff under protest, in its capacity of
administrator of the estate of the late Adolphe Oscar Schuetze, as inheritance tax upon the
sum of P20,150, which is the amount of an insurance policy on the deceased's life, wherein
his own estate was named the beneficiary.
At the hearing, in addition to documentary and parol evidence, both parties submitted the
following agreed statement of facts of the court for consideration:

It is hereby stipulated and agreed by and between the parties in the above-entitled
action through their respective undersigned attorneys:

1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late Adolphe
Oscar Schuetze, is of legal age, a native of Manila, Philippine Islands, and is and
was at all times hereinafter mentioned a resident of Germany, and at the time of the
death of her husband, the late Adolphe Oscar Schuetze, she was actually residing
and living in Germany;

2. That the Bank of the Philippine Islands, is and was at all times hereinafter
mentioned a banking institution duly organized and existing under and by virtue of
the laws of the Philippine Islands;

3. That on or about August 23, 1928, the herein plaintiff before notary public
Salvador Zaragoza, drew a general power appointing the above-mentioned Bank of
the Philippine Islands as her attorney-in-fact, and among the powers conferred to
said attorney-in-fact was the power to represent her in all legal actions instituted by
or against her;

4. That the defendant, of legal age, is and at all times hereinafter mentioned the duly
appointed Collector of Internal Revenue with offices at Manila, Philippine Islands;

5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for the
first time of March 31, 1890, and worked in the several German firms as a mere
employee and that from the year 1903 until the year 1918 he was partner in the
business of Alfredo Roensch;

6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of
making various trips to Europe;

7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java,
and with the intention of going to Bremen, landed in the Philippine Islands where he
met his death on February 2, 1928;

8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany,
executed a will, in accordance with its law, wherein plaintiff was named his universal
heir;

9. That the Bank of the Philippine Islands by order of the Court of First Instance of
Manila under date of May 24, 1928, was appointed administrator of the estate of the
deceased Adolphe Oscar Schuetze;

10. That, according to the testamentary proceedings instituted in the Court of First
Instance of Manila, civil case No. 33089, the deceased at the time of his death was
possessed of not only real property situated in the Philippine Islands, but also
personal property consisting of shares of stock in nineteen (19) domestic
corporations;

11. That the fair market value of all the property in the Philippine Islands left by the
deceased at the time of his death in accordance with the inventory submitted to the
Court of First Instance of Manila, civil case No. 33089, was P217,560.38;

12. That the Bank of the Philippine Islands, as administrator of the estate of the
deceased rendered its final account on June 19, 1929, and that said estate was
closed on July 16, 1929;

13. That among the personal property of the deceased was found life-insurance
policy No. 194538 issued at Manila, Philippine Islands, on January 14, 1913, for the
sum of $10,000 by the Sun Life Assurance Company of Canada, Manila branch, a
foreign corporation duly organized and existing under and by virtue of the laws of
Canada, and duly authorized to transact business in the Philippine Islands;

14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was
named the beneficiary without any qualification whatsoever;

15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the
premiums of said policy to the Sun Life Assurance Company of Canada, Manila
branch;

16. That on or about the year 1918, the Sun Life Assurance Company of Canada,
Manila branch, transferred said policy to the Sun Life Assurance Company of
Canada, London branch;

17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the time
of his death paid the premiums of said policy to the Sun Life Assurance Company of
Canada, London Branch;

18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his
widow, the plaintiff herein;

19. That at the time of the death of the deceased and at all times thereafter including
the date when the said insurance policy was paid, the insurance policy was not in
the hands or possession of the Manila office of the Sun Life Assurance Company of
Canada, nor in the possession of the herein plaintiff, nor in the possession of her
attorney-in-fact the Bank of the Philippine Islands, but the same was in the hands of
the Head Office of the Sun Life Assurance Company of Canada, at Montreal,
Canada;

20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of the
decedent's estate received from the Sun Life Assurance Company of Canada,
Manila branch, the sum of P20,150 representing the proceeds of the insurance
policy, as shown in the statement of income and expenses of the estate of the
 deceased submitted on June 18, 1929, by the administrator to the Court of First
Instance of Manila, civil case No. 33089;

21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said
sum of P20,150;

22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax
upon the transmission of the proceeds of the policy in question in the sum of
P20,150 from the estate of the late Adolphe Oscar Schuetze to the sole heir of the
deceased, or the plaintiff herein, which inheritance tax amounted to the sum of
P1,209;

23. That the Bank of the Philippine Islands as administrator of the decedent's estate
and as attorney-in-fact of the herein plaintiff, having been demanded by the herein
defendant to pay inheritance tax amounting to the sum of P1,209, paid to the
defendant under protest the above-mentioned sum;

24. That notwithstanding the various demands made by plaintiff to the defendant,
said defendant has refused and refuses to refund to plaintiff the above mentioned
sum of P1,209;

25. That plaintiff reserves the right to adduce evidence as regards the domicile of the
deceased, and so the defendant, the right to present rebuttal evidence;

26. That both plaintiff and defendant submit this stipulation of facts without prejudice
to their right to introduce such evidence, on points not covered by the agreement,
which they may deem proper and necessary to support their respective contentions.

In as much as one of the question raised in the appeal is whether an insurance policy on
said Adolphe Oscar Schuetze's life was, by reason of its ownership, subject to the
inheritance tax, it would be well to decide first whether the amount thereof is paraphernal or
community property.

According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze
is the sole beneficiary named in the life-insurance policy for $10,000, issued by the Sun Life
Assurance Company of Canada on January 14, 1913. During the following five years the
insured paid the premiums at the Manila branch of the company, and in 1918 the policy was
transferred to the London branch.

The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant
Rosario Gelano on January 16, 1914.

With the exception of the premium for the first year covering the period from January 14,
1913 to January 14, 1914, all the money used for paying the premiums, i. e., from the
second year, or January 16, 1914, or when the deceased Adolphe Oscar Schuetze married
the plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is conjugal
property inasmuch as it does not appear to have exclusively belonged to him or to his wife
(art. 1407, Civil Code). As the sum of P20,150 here in controversy is a product of such
premium it must also be deemed community property, because it was acquired for a
valuable consideration, during said Adolphe Oscar Schuetze's marriage with Rosario
Gelano at the expense of the common fund (art. 1401, No. 1, Civil Code), except for the
small part corresponding to the first premium paid with the deceased's own money.

In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats
of life insurance in the following terms, to wit:

The amount of the policy represents the premiums to be paid, and the right to it
arises the moment the contract is perfected, for at the moment the power of
disposing of it may be exercised, and if death occurs payment may be demanded. It
is therefore something acquired for a valuable consideration during the marriage,
though the period of its fulfillment, depend upon the death of one of the spouses,
which terminates the partnership. So considered, the question may be said to be
decided by articles 1396 and 1401: if the premiums are paid with the exclusive
property of husband or wife, the policy belongs to the owner; if with conjugal
property, or if the money cannot be proved as coming from one or the other of the
spouses, the policy is community property.

The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ.
A., 509) laid down the following doctrine:

COMMUNITY PROPERTY LIFE INSURANCE POLICY. A husband took out

an endowment life insurance policy on his life, payable "as directed by will." He paid
the premiums thereon out of community funds, and by his will made the proceeds of
the policy payable to his own estate. Held, that the proceeds were community estate,
one-half of which belonged to the wife.

In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the
following doctrine:

A testator, after marriage, took out an insurance policy, on which he paid the
premiums from his salary. Held that the insurance money was community property,
to one-half of which, the wife was entitled as survivor.

In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following
doctrine:

A decedent paid the first third of the amount of the premiums on his life-insurance
policy out of his earnings before marriage, and the remainder from his earnings
received after marriage. Held, that one-third of the policy belonged to his separate
estate, and the remainder to the community property.

Thus both according to our Civil Code and to the ruling of those North American States
where the Spanish Civil Code once governed, the proceeds of a life-insurance policy
whereon the premiums were paid with conjugal money, belong to the conjugal partnership.
The appellee alleges that it is a fundamental principle that a life-insurance policy belongs
exclusively to the beneficiary upon the death of the person insured, and that in the present
case, as the late Adolphe Oscar Schuetze named his own estate as the sole beneficiary of
the insurance on his life, upon his death the latter became the sole owner of the proceeds,
which therefore became subject to the inheritance tax, citing Del Val vs. Del Val (29 Phil.,
534), where the doctrine was laid down that an heir appointed beneficiary to a life-insurance
policy taken out by the deceased, becomes the absolute owner of the proceeds of such
policy upon the death of the insured.

The estate of a deceased person cannot be placed on the same footing as an individual
heir. The proceeds of a life-insurance policy payable to the estate of the insured passed to
the executor or administrator of such estate, and forms part of its assets (37 Corpus Juris,
565, sec. 322); whereas the proceeds of a life-insurance policy payable to an heir of the
insured as beneficiary belongs exclusively to said heir and does not form part of the
deceased's estate subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris,
566, sec. 323, and articles 419 and 428 of the Code of Commerce.)

Just as an individual beneficiary of a life-insurance policy taken out by a married person

becomes the exclusive owner of the proceeds upon the death of the insured even if the
premiums were paid by the conjugal partnership, so, it is argued, where the beneficiary
named is the estate of the deceased whose life is insured, the proceeds of the policy
become a part of said estate upon the death of the insured even if the premiums have been
paid with conjugal funds.

In a conjugal partnership the husband is the manager, empowered to alienate the

partnership property without the wife's consent (art. 1413, Civil Code), a third person,
therefore, named beneficiary in a life-insurance policy becomes the absolute owner of its
proceeds upon the death of the insured even if the premiums should have been paid with
money belonging to the community property. When a married man has his life insured and
names his own estate after death, beneficiary, he makes no alienation of the proceeds of
conjugal funds to a third person, but appropriates them himself, adding them to the assets
of his estate, in contravention of the provisions of article 1401, paragraph 1, of the Civil
Code cited above, which provides that "To the conjugal partnership belongs" (1) Property
acquired for a valuable consideration during the marriage at the expense of the common
fund, whether the acquisition is made for the partnership or for one of the spouses only."
Furthermore, such appropriation is a fraud practised upon the wife, which cannot be allowed
to prejudice her, according to article 1413, paragraph 2, of said Code. Although the
husband is the manager of the conjugal partnership, he cannot of his own free will convert
the partnership property into his own exclusive property.

As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar
Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the proceeds
of the policy, excluding the proportional part corresponding to the first premium, constitute
community property, notwithstanding the fact that the policy was made payable to the
deceased's estate, so that one-half of said proceeds belongs to the estate, and the other
half to the deceased's widow, the plaintiff-appellant Rosario Gelano Vda. de Schuetze.
The second point to decide in this appeal is whether the Collector of Internal Revenue has
authority, under the law, to collect the inheritance tax upon one-half of the life-insurance
policy taken out by the late Adolphe Oscar Schuetze, which belongs to him and is made
payable to his estate.

According to the agreed statement of facts mentioned above, the plaintiff-appellant, the
Bank of the Philippine Islands, was appointed administrator of the late Adolphe Oscar
Schuetze's testamentary estate by an order dated March 24, 1928, entered by the Court of
First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of Canada,
whose main office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her
arrival at Manila, the sum of P20,150, which was the amount of the insurance policy on the
life of said deceased, payable to the latter's estate. On the same date Rosario Gelano Vda.
de Schuetze delivered the money to said Bank of the Philippine Islands, as administrator of
the deceased's estate, which entered it in the inventory of the testamentary estate, and then
returned the money to said widow.

Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and
section 1 of Act No. 3031, contains the following relevant provision:

SEC. 1536. Conditions and rate of taxation. Every transmission by virtue of

inheritance, devise, bequest, gift mortis causa or advance in anticipation of
inheritance, devise, or bequest of real property located in the Philippine Islands and
real rights in such property; of any franchise which must be exercised in the
Philippine Islands; of any shares, obligations, or bonds issued by any corporation
or sociedad anonimaorganized or constituted in the Philippine Islands in accordance
with its laws; of any shares or rights in any partnership, business or industry
established in the Philippine Islands or of any personal property located in the
Philippine Islands shall be subject to the following tax:

xxx xxx xxx

In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar
Schuetze were paid to the Bank of the Philippine Islands, as administrator of the
deceased's estate, for management and partition, and as such proceeds were turned over
to the sole and universal testamentary heiress Rosario Gelano Vda. de Schuetze, the
plaintiff-appellant, here in Manila, the situs of said proceeds is the Philippine Islands.

In his work "The Law of Taxation," Cooley enunciates the general rule governing the levying
of taxes upon tangible personal property, in the following words:

GENERAL RULE. The suits of tangible personal property, for purposes of

taxation may be where the owner is domiciled but is not necessarily so. Unlike
intangible personal property, it may acquire a taxation situs in a state other than the
one where the owner is domiciled, merely because it is located there. Its taxable
situs is where it is more or less permanently located, regardless of the domicile of
the owner. It is well settled that the state where it is more or less permanently
located has the power to tax it although the owner resides out of the state,
regardless of whether it has been taxed for the same period at the domicile of the
 owner, provided there is statutory authority for taxing such property. It is equally well
settled that the state where the owner is domiciled has no power to tax it where the
property has acquired an actual situs in another state by reason of its more or less
permanent location in that state. ... (2 Cooley, The Law of Taxation, 4th ed., p. 975,
par. 451.)

With reference to the meaning of the words "permanent" and "in transit," he has the
following to say:

PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. In order to acquire a

situs in a state or taxing district so as to be taxable in the state or district regardless
of the domicile of the owner and not taxable in another state or district at the
domicile of the owner, tangible personal property must be more or less permanently
located in the state or district. In other words, the situs of tangible personal property
is where it is more or less permanently located rather than where it is merely in
transit or temporarily and for no considerable length of time. If tangible personal
property is more or less permanently located in a state other than the one where the
owner is domiciled, it is not taxable in the latter state but is taxable in the state where
it is located. If tangible personal property belonging to one domiciled in one state is
in another state merely in transitu or for a short time, it is taxable in the former state,
and is not taxable in the state where it is for the time being. . . . .

Property merely in transit through a state ordinarily is not taxable there. Transit
begins when an article is committed to a carrier for transportation to the state of its
destination, or started on its ultimate passage. Transit ends when the goods arrive at
their destination. But intermediate these points questions may arise as to when a
temporary stop in transit is such as to make the property taxable at the place of
stoppage. Whether the property is taxable in such a case usually depends on the
length of time and the purpose of the interruption of transit. . . . .

. . . It has been held that property of a construction company, used in construction of

a railroad, acquires a situs at the place where used for an indefinite period. So
tangible personal property in the state for the purpose of undergoing a partial
finishing process is not to be regarded as in the course of transit nor as in the state
for a mere temporary purpose. (2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983
and 988, par. 452.)

If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze
and made payable to his estate, were delivered to the Bank of the Philippine Islands for
administration and distribution, they were not in transit but were more or less permanently
located in the Philippine Islands, according to the foregoing rules. If this be so, half of the
proceeds which is community property, belongs to the estate of the deceased and is subject
to the inheritance tax, in accordance with the legal provision quoted above, irrespective of
whether or not the late Adolphe Oscar Schuetze was domiciled in the Philippine Islands at
the time of his death.

By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a life-
insurance policy payable to the insured's estate, on which the premiums were paid by the
conjugal partnership, constitute community property, and belong one-half to the husband
and the other half to the wife, exclusively; (2) that if the premiums were paid partly with
paraphernal and partly conjugal funds, the proceeds are likewise in like proportion
paraphernal in part and conjugal in part; and (3) that the proceeds of a life-insurance policy
payable to the insured's estate as the beneficiary, if delivered to the testamentary
administrator of the former as part of the assets of said estate under probate administration,
are subject to the inheritance tax according to the law on the matter, if they belong to the
assured exclusively, and it is immaterial that the insured was domiciled in these Islands or
outside.1awphil.net

Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return
to the plaintiff the one-half of the tax collected upon the amount of P20,150, being the
proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze, after
deducting the proportional part corresponding to the first premium, without special
pronouncement of costs. So ordered.

Avancea, C.J., Johnson, Street, Malcolm, Villamor, and Ostrand, JJ., concur.